The first ‘Flex Benefits Plan’ in Canada was set up in British Columbia by the Cominco Mining Company in the 1970s. It is estimated there are over 500 companies in Canada with some form of Flexible Employee Benefit program today. Most of that participation has happened in the past 10 years and the numbers are growing larger each year now.
A flexible benefit approach is a method of structuring benefits within a compensation package to maximize the cost effectiveness of the substantial and growing expenditures plan sponsors are making for employee benefits.
Cost Effective
Cost effectiveness can be improved by:
• Controlling health care costs – directly and by supporting point-of-delivery
cost control programs i.e. Managed Health Care, Drug Cards
• Limiting the growth in new benefits
• Minimizing unneeded and/or duplicate benefits
• Relating benefits to the changing demographics of the workforce
• Establishing the worth of benefits and involving employees in their costs
• Maximizing the use of before tax dollars
• Creating a “new look” by dealing with rising costs in an innovative manner
• Giving employees freedom to choose their benefits and not continue providing
all benefits to all employees
Costs and Savings
Areas in which unexpected costs can occur where opportunities for savings are missed are usually subtle. They require experience in costing, reserving and funding traditional benefits and the special issues that arise in flexible benefit planning.
For example:
• Flexible plans can involve employees in benefit costs, thereby encouraging them to limit
their use of health services. Of even greater importance, flexible plans need to support
cost management programs such as shopping for competitively priced dental services,
using generic drug plans, getting second opinions for specialty medical expenses and
outpatient services. It is important the program be designed to encourage this support.
• Liabilities for post retirement benefits and sick leave can be moderated by including these
in a realignment of benefits centered on a flexible plan.
• Optional benefits can create costly adverse selection if enrollment shifts are not carefully
anticipated and options are not priced properly.
• Flexible spending accounts, which can be used to pay deductibles and coinsurance, can
unintentionally produce “first dollar” coverage and increase rather than decrease costs
if not designed properly.
Process
Developing a flexible benefit plan involves several areas of activity:
• The wide range of choices inherent in flexible programs inevitably leads to an examination
of all benefits and compensation issues simultaneously.
• Maximizing savings involves consideration of financial, funding and investment issues
concurrently.
• Communicating the program and developing employee support before the plan is implemented requires a well-coordinated communications program.
• Credibility for the program results from prompt payment of claims, so that plan implementation must be accompanied by an administrative system that works well from the outset.
Therefore, the overall purposes of flexible benefit plans are to:
Improve compensation effectiveness
• Fit different needs and preferences – diverse demographics, needs that change over time
• Educate employees on workings of plans
• Maximize tax effectiveness
Increase perceived value
• Greater awareness of compensation
• Greater satisfaction with Company expenditures
• More benefit options than traditional approach
• Importance of individual
Contain Cost
• The company and employee share future cost increases
• Add new coverages (options)
• Provide financial incentives
• More palatable cost shifting
Manage compensation more effectively
• Emphasize total compensation
• Reverse trend to performance base
• Uniform structure for acquisitions
• Provides sound financial negotiations with unions
Be a “Leading Edge” Employer
• Companies with a “flex” approach to benefits are considered to be progressive in
all areas of what they do
The Changing Workforce
One of the major reasons plan sponsors implement flexible benefit plans is to attempt to meet the needs of their changing workforce. These include the increased number of working women, employees with working spouses and working single parents. Also of importance is the need to address the diversity in the workforce with respect to the ages of employees and family composition.
Family composition has changed dramatically in recent years. Since the vast majority of plan designs were developed around only the husband working, plan designs have become obsolete.
The present demographics of family composition in Canada are approximately:
• Married – both spouses work 45%
• Single, head of household – no dependents 25%
• Married – husband works and wife does not 20%
• Single, head of household – with dependents 10%
Rising educational levels have also changed attitudes regarding the motivation for flexible benefit plans. There are changing expectations to more job satisfaction and less job security; employees see inflation eating into their buying power; and the government continues to force mandated benefits.
Easing Pressure for Additional Benefits
Flexible benefit plans can ease the pressure on plan sponsors either to increase existing benefit levels or to provide new types of benefits. In the context of a traditional non-flexible benefit plan, an increase in the level of benefits provided by one segment of the plan very rarely resulted in a corresponding decrease in the level of benefits provided by some other segment of the plan. This being the case, the addition of a new type of benefit, or increase in the level of an existing benefit, almost always resulted in increased costs to the plan sponsor and, in some cases, the employees.
Employee Appreciation
Many plan sponsors feel that, if employees are given a choice in structuring the benefits program, the individual employee will be more appreciative of the overall compensation package. When employees are given more say in the structure of their benefits program, those employees feel involved in a process that was, for the most part, totally controlled by the plan sponsor. The reaction of employees to well-thought-out flexible benefits plans has been extremely favorable.
Core-Plus-Options Plans
A core-plus-options plan is the most popular of the various flex benefit type plans. It allows employees to make selections among various options that complement a fixed core of benefits.
In order to launch a core-plus-options plan a plan sponsor must be prepared to:
• Adapt payroll operation to handle payroll deduction for benefits
• Establish a specific data link between human resources and payroll to manage in-house benefit eligibility information
• Coordinate enrollment/eligibility with the entities handling claim administration for various coverage
(and levels of coverage)
• Communicate with employees initially and during the plan year
• Develop or find pricing expertise and design capabilities
Once the plan is up and running, the plan sponsor must continuously monitor the plan, communicate with new and continuing employees and maintain design/pricing expertise and all systems linkages.
Administration
A critical component to a successful flexible benefits program is the administration system that manages the program. The systems responsibilities include:
• A communication booklet explaining the program and it’s process
• A personalized menu of benefit options
• Personalized employee communication for enrollment
• A system for recording the benefit selections by employees
• A personalized communication to confirm benefit selection
• A positive billing for the insurer
• Benefit listings by employee for claims adjudication
• Reports for payroll deduction amounts per benefit per employee
• Taxable benefit reports by Province by benefit by employee
All of this information can be produced by a single software program or an internet based system capable of communicating with the payroll system.
Summary
Flex Benefits can be reasonably implemented in companies with as low as 50 employees. The cost to implement a program can be tailored to your budget – I have successfully worked with a client who spent $5,000 and took only four months from the beginning to implementation date, and the plan went smoothly. Another client (national with locations across the country) spent over $100,000 and nearly 1 ½ years to launch their Flex Plan.
Unlike many articles written about “Flex Benefits” it doesn’t have to cost a lot, take a long time or be limited to only very large companies.
It is a “matter of choice”.
